What To Do When You're Stuck In A Massive Auto Loan

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We all make mistakes, and sometimes small mistakes lead to bigger ones—especially when it comes to debt. It’s easy to get on a high horse and tell someone what they should or shouldn’t have done; coming up with solutions can be a lot harder, and this debt-saddled car owner needs a fix and not more judgment.

(Welcome to a Ask Automatch! Where you get to ask me your burning car buying questions. Got a scenario or a situation and you aren’t sure what to do? Send me an email at tom.mcparland@jalopnik.com and I’ll try to help you out.)

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This week’s letter comes from Tim, he has gotten himself into a bind with a combination of bad decisions and now needs away out. He had a truck he was using as a work vehicle, but traded it in for another truck, and now he’s locked into a much more expensive and longer car loan with a lot more negative equity.

Up until a few months ago, I had a new 2016 F-350 with snow equipment I used as a second income. The truck was great. My first mistake was selling it because I thought I didn’t want to do snow removal anymore. My second mistake was buying a new Toyota Tundra TRD pro, because I mistakenly believed it would be a bit cheaper and last longer.

I don’t have a problem with the vehicle itself, just the interest rate, term and everything financially related. It’s absolutely destroying my family budget and looking for a way to get out of it and get a smaller vehicle and get back on track financially.

Here’s my problem. I have huge negative equity thanks to interest and how the loan is structured. I’ve read one of Jalopnik articles that suggested getting a lease to absorb the negative equity, find a vehicle that has high incentives to reduce the hit and after 36 months, be able to start fresh.

It’s nearly impossible to find a lease (or dealer) that would even allow me to lease with the negative equity which works out to be about 15-16k dollars and even if the dealer manages to get it through, the monthly payment is just as high as my current truck at $900/mo.

My truck is an 85 month loan, at 8% interest, and yes, it’s a new vehicle with a high interest rate andI had 2-3k in negative equity rolled in from the previous truck.”

Wow, so the key takeaways here are $16,000 in negative equity, 8 percent APR, and an 85-month loan with payments at $900 a month. You’re in quite the pickle, Tim. But fear not—there is a way out of this, but it’s going to take some work and some discipline.

Before I get into what Tim should do, I’d like to take a moment to address a learning opportunity for anyone reading this.

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First, if you have a vehicle that is treating you well and bringing in extra income. Do not get rid of that car especially if that car is brand new. That is a surefire way to put yourself in a negative equity situation and your net loss will be even greater because you no longer have the additional income.

Second, don’t be fooled into thinking that you can “afford” a car if the payments are stretched out over an 85-month term. A $900 payment at 8 percent interest means that your total loan cost will be $76,500… that’s a lot of money to spend on a Toyota truck! Always look at the big picture before jumping into something like this.

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Tim is correct that I once suggested rolling negative equity into a lease to help break the cycle. However, that really only works when you are a couple of grand under water. Once you surpass $10,000, it’s a pretty different situation.

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As Tim has experienced, dealers have a hard time getting lenders to approve loans and leases with that massive amount of negative equity rolled in. What he needs to do is find a way to pay down the principal so that he can trade or sell his truck without rolling all that extra balance into another car loan.

A lease may still be in the cards, but the strategy here is to divide and conquer. The first step is to get a personal loan for the $16,000 worth of negative equity, and then use that money toward the principal of the truck loan. If Tim has good credit and a healthy debt to income ratio, he can get and unsecured personal loan for as low as 10 percent APR.

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By taking a five-year term he would have personal loan payments of $340 a month. That’s still a lot of money to pay for a car you don’t have, but it’s better than the alternative.

Tim’s second step is to get a cheap lease with no money down. I recently did a lease deal for a client on a brand new Honda Civic EX. You don’t have to be stuck with a base model! That car was just $250 month with zero out of pocket and all taxes and fees included. This would bring the combined payment to $590 a month.

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I know what you are thinking... why would I pay almost $600 a month to drive a Civic? Because it’s better than paying $900 a month to drive a Tundra. If you’re disciplined you will wipe out the $16,000 personal loan in five years and by the time the lease on your second cheap car is done, you will be free.

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About the author

Tom McParland

Tom is a contributing writer for Jalopnik and runs AutomatchConsulting.com. He saves people money and takes the hassle out of buying or leasing a car. (Facebook.com/AutomatchConsulting)